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Fred’s Inc. (NASDAQ:FRED)

F4Q07 Earnings Call

March 27, 2008 10:00 am ET

Executives

Pat Watson – Corporate Communications

Jerry Shore - Executive Vice President and Chief Financial Officer

Michael Hayes - Chief Executive Officer

Bruce Efird –President

Keith Curtis - Executive Vice President and General Merchandise Manager

Rick Chambers - Executive Vice President of Pharmacy Operations

Analysts

Charles Brohm - JP Morgan Chase

William Keller - FTN Midwest

Jill Caruthers - Johnson Rice

David Magee - SunTrust Robinson and Humphrey

Andrew Wilson - BB&T Capital Markets

John Lawrence - Morgan Keegan

Operator

Good day everyone and welcome to Fred's conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Pat Watson. Please go ahead sir.

Pat Watson

Good morning everyone. This is Pat Watson with corporate communications. Thank you for joining Fred's to review the company's financial and operating results for the fourth quarter and fiscal year 2007 which ended on February 2, 2008.

Before we begin I would like to remind everyone that management's comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made on the reliance of safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to uncertainties and risks. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements.

Some of the factors that could cause or contribute to such differences have been described in the news release issued earlier this morning and the company's annual report on form 10K and other filings with the SEC. We refer you to these sources for further information.

Lastly, I would like to point out that management remarks during this conference call are based on information in understanding that are believed accurate as of today's date. Because of the time sensitive nature of this information, it is Fred's policy to limit the archived replay of its conference call webcasts to a period of 30 days. This call is the property of Fred's. Any distribution, transmission, broadcast, or rebroadcast of this call for commercial purposes in any form without the express written consent of the company is prohibited.

With those announcements I'll turn the call over to Jerry Shore, the company's Chief Financial Officer. Good morning Jerry.

Jerry Shore

Good morning, Pat and good morning and thank you all of you for joining us this morning for our discussion of the fourth quarter and fiscal 2007 results. With me this morning and available for questions are Michael Hayes, Chief Executive Officer; Bruce Efird, President; Keith Curtis, EVP and General Merchandise Manager; Rick Chambers,

Executive Vice President of Pharmacy Operations.

As the company reported in its press release earlier this morning, for the 13 week fourth quarter of 2007 total sales decreased 8% to $494.1 million compared with $535.6 million in the 14 week quarter of last year. The fourth quarter of 2007 had one fewer week in the quarter as a result of 2006 being a 53 week year. Adjusting for the additional week sales decreased 2% in the fourth quarter and on a comparable sort of basis sales decreased 2.5% for the quarter compared with an increase of 2% in the fourth quarter a year ago.

The sales mix for the period was 29.3% household goods, 13.8% food and tobacco, 7.6% health and beauty aid, 8.8% paper and chemical, 10% apparel, 29.4% pharmacy, and 1.9% franchise. This compares with the following mix in the same quarter last year: 28.8% household goods, 12.8% food and tobacco, 7.7% health and beauty aid, 8% paper and chemical, 11.9% apparel, 29% pharmacy, and 1.8% franchise.

Fourth quarter comparable store customer traffic decreased approximately 1.7% from last year, while the average customer transaction amount decreased .8% to $19.51.

For the 52 week 2007 fiscal year, total sales reached $1.78 billion compared with $1.77 billion for the 53 week year 2006, reflecting a 1% increase. Excluding the effects of the extra week last year, sales increased 2% for the year. Comparable store sales for the year increased .3% on top of the 2.4% increase in the prior year.

The sales mix for all of 2007 was 28.4% household goods, 14.2% food and tobacco, 8% health and beauty aids, 8.8% paper and chemical, 9.9% apparel, 32.2% pharmacy, and 2.1% franchise. And this compares with the following mix last year: 24.7% household goods, 13% food and tobacco, 8% health and beauty aid, 8.6% paper and chemical, 11.7% apparel, 31.9% pharmacy, and 2.1% franchise.

Sales for average selling square-foot in 2007 were $177 per square foot. Ends on a full year basis comparable store customer transactions decreased approximately .6%, while the average customer think it increased .9% to $18.75.

Before turning to operating and income results I'll summarize the charges that the company reported in the fourth quarter for the announced closings and 75 stores. The company recognized pretax charges for the fourth quarter of approximately $14.6 million related to these restructuring items. Gross profit was reduced by $10 million for the markdowns associated with inventory that will be disposed and cleared out on the planned store and pharmacy closings. The estimated amounts are based on management's estimates and the actual results may vary materially based on various factors such as timing of execution, retail market conditions, and competition.

SG&A expenses were increased by $4.6 million for the write down for impairment charges of fixed assets relating to the store and pharmacy closings outside of the normal course of business.

Costs related to lease buyout costs and other store closing costs are not included in the restructuring reserves and are accounted for at the time of the actual [inaudible] date. There is approximately $10.8 million in our teeth thousand and eight operating plan related cost of closing stores. As announced in February this plan is designed to improve Fred's core store performance. The closing of these underperforming stores and trimming corporate and field overhead will generate $11 million in annualized operating cost savings.

For the fourth quarter 2007, threats reported a net loss of $4.1 million or $.11 per diluted share after recognizing charges in the quarter totaling $14.6 million related to the plans to close the 75 stores and that is $9.9 million or $.25 per diluted share after taxes. Excluding these charges net loss in the quarter was $5.5 million or $.14 per diluted share.

For the year ended February 2, 2008, net income title $10.7 million or $.27 per diluted share, compared with net income of $26.7 million or $.67 per diluted share for 2006. The store closing expenses for the full year which are included in earnings for 2007 were $.25 per diluted share and excluding these charges net income in 2007 was $20.7 million or $.52 per diluted share.

The operating loss for the fourth quarter of 2007, including the aforementioned $14.6 (million) in restructuring charges was $7.6 million versus operating income of $14.4 million in the year earlier period. The operating loss was 1.5% of sales in the fourth quarter 2007 compared with 2.7% of sales last year. Operating income for 2007 totaled $16.5 million or down from $40.9 million in the prior year. Operating income for 2007 was .9% of sales versus 2.3% of sales for 2006. Again, excluding the restructuring charge effects, operating income as a percent of sales in the fourth quarter was 1.4% compared with 3.2% in the same period last year and for the full year 2007, excluding these charges, operating income was 1.7% of sales compared with 2.5% of sales last year.

Fred gross profit for the fourth quarter declined 17% to $116.8 million from $140.5 million in the prior year. Gross margins for the quarter was 23.6% compared with 26.2% in the fourth quarter last year. Gross profit for the quarter included an estimate of approximately $10 million or 2% of sales floor inventory liquidation associated with the planned store closings. Additionally, gross margin in the fourth quarter was adversely affected by lower it additional markups, a change in general merchandise product mix, higher promotional markdowns reflecting the competitive environment. The pharmacy department continues to see improvement in gross profit margins, primarily as a result of the continuing shift to generic product sales.

Gross profit for 2007 decline 1% to $490.2 million from $494.9 million in 2006. Gross margin for 2007 was 27.5% verses 28.0% last year. Gross profit for the year included the estimated cost of $10 million or .6% of sales floor inventory liquidation. An improvement in the pharmacy gross margin offset the or lower general merchandise margin for the year 2007.

SG&A expenses for the fourth quarter 2007 increased 21.5% of sales versus 23.5% of sales in the year earlier period. Expenses in the quarter included $4.6 million or .9% of sales for estimated costs of impaired lease hold improvements related to play and store closings. Expenses for store and pharmacy labor, legal and professional fees, fuel and utilities in increased as a percent of sales in the fourth quarter. In 2007 SG&A expenses were 26.6% of sales compared with 25.5% of sales in the prior year.

Interest expense for the fourth quarter totaled $299,000 versus $234,000 in the same period last year and for the year by 2007 net interest expense totaled $793,000 which is less than .1% of sales versus $736,000 in 2006. The increase in interest primarily results from higher capital expenditures and is partially offset by controlling inventory purchases throughout the year.

Income tax expense declined to 31.6% of pretax income for fiscal 2007 compared with 33.5% last year and a favorable tax rate results from available income tax credit in relation to the lower pretax income in 2007.

Moving to the balance sheet, total inventory at a year in increased 5% to $320.3 million compared to $305 million at the end of 2006. The increases in inventory were primarily in the base and consumable product category in line with the company initiative to improve in stock positions in the areas of our stores where customer traffic would grow in the short term. Inventory turnover and fiscal 2007 was 3.8 times which is the same as last year.

Capital expenditure in the fourth quarter of 2007 totaled $6.3 million compared with $7.1 million in the last quarter of 2006. For the full year 2007 capital expenditures totaled $38.7 million compared with $23.5 million in 2006. The breakdown of those capital expenditures were as follows: $8.8 million for new stores and pharmacies, $11.7 million for real estate and store acquisitions, $14 million for existing store improvements which included ongoing improvements as well as our refresher program, $2.1 million for technology, and $2.1 million per distribution of corporate expenditures. In addition, there was $1.6 million related to acquisitions of pharmacies during 2007 as compared to $3.4 million last year.

Total indebtedness at the end of the quarter was $35.9 million. The increase in debt over $3.1 million at the end of 2007 resulted primarily from the increase in inventory to improve store in stock positions and the additional capital expenditures to acquire and upgrade our stores.

In the fourth quarter, Fred opened nine stores, closed one store, and opened two pharmacies reading total for the year to 35 store openings, 20 closed stores, 11 pharmacy openings, and four pharmacy closings. Fred total square footage increased approximately 2.7% for the year, ending the year at 10.2 million square-feet. At the end of 2007 there were 716 Fred’s stores including 24 franchised stores and 296 pharmacies.

Pursuant to the recently announced strategic plans, Fred expects to open 18 stores and 15 pharmacies in 2008, and closed approximately 75 underperforming stores and 22 pharmacies during the coming year. In 2007 the 75 stores slated for closure had aggregate sales of $112 million, and aggregate operating loss of approximately $9 million.

Looking ahead, the company expects total earnings per diluted share for 2008 to be in the range of $.52 to $.58 including those costs in 2008 relating to the announced store closings. Excluding these one time charges of $10.8 million, but including $5.2 million impact is minimal wage increases, earnings per share in 2008 are forecasted to be in the range of $.70 to $.76 per diluted share. For the first quarter of 2008 Fred’s expects earnings per diluted share to be in the range of $.15 to $.18 per share. Comparable core sales for the first quarter are expected to be in the range of positive 1 to 3%.

This concludes our financial summary. We will be happy to answer any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go to Charles Brohm of JP Morgan Chase.

Charles Brohm - JP Morgan Chase

Thanks, good morning. You’re 1Q comp outlook Jerry just talked about, implies a pretty nice pickup sequentially, and I know February ex the leap year, you guys were off to a pretty good start. Could you just give us a little bit of sense for why you feel so optimistic about the quarter?

Bruce Efird

Yes, this is Bruce Efird. I'll take that question. One, as Jerry referenced in his comments, we have a focus on in stocks, primarily in stocks on our consumables and have targeted focus on 776 items that make up approximately 46% of our sales. And today we are running a service level about 10% higher than the same time last year, and we will continue that focus. The second initiatives that we have in place is are focused store program, our top 50 stores, and currently those stores with incremental promotional activity focusing in on operating the facilities, are running at about 3% comps higher. We have a comparable program that Rick Chambers and his team put in place in the pharmacy to focus on driving sales in our top performing pharmacy stores as well. We are on track in growing our pharmacy business, as far as our incremental File buys, our pharmacist group File buys, and that’s another area that we’re focusing in on growing sales in the pharmacy.

Charles Brohm - JP Morgan Chase

And just those percentages you went into the 3% of the 10 for 10, those are from the beginning of the year through the date, is that how I should look at that number?

Bruce Efird

That is correct.

Charles Brohm - JP Morgan Chase

Are you seeing a conflict in the 75 stores that you closed, I know you alluded to some of the mark down pressure, is any of that giving you a lift to the term period?

Jerry Shore

So far the store closings are only starting in terms of the actual closings. In the month of February, those 75 stores performed at a negative 3% comp, and our other stores performed at a positive 1.4%, the net being the 1.1 that we reported.

Charles Brohm - JP Morgan Chase

Exactly, but as I recall last year, those underperforming stores were comping more in the mid to high single digit range so I am just wondering why those underperforming stores improved. I'm wondering if it's just through some markdown activity, if it's not I was wondering if you could clarify it?

Bruce Efird

The underperforming stores, when you actually close out the store there is a very negative comp. Because you're closing in out at a discount when you do GOP in the neighborhood of 40 to 50% off, so it doesn't give you a comp gain, it gives you a negative comp when you actually close a store. The aggregate number, depending on the length of time that it takes for you to do out the close and how much you move out, but last year we did last year, those stores I don’t…

[Technical Break In Recording]

Unidentified Analyst

Great, my second and last question would be just on the overall EPS guidance. It looks like, and Jerry tell me if I'm wrong, implies about roughly 2.5%, 2.7% of operating margin ex all the charges including the minimum-wage you’re going to take, is that about right?

Rick Chambers

Yes very much so, Jeff it is 2.7% operating margin for 2008.

Unidentified Analyst

So that's about a 100 basis point increase year over year?

Rick Chambers

Keep in mind that 75 store closings are included in that.

Unidentified Analyst

What’s that going to give you, kind of, of that 100 basis point increase? How much is the store closings and how much is, you know, operating leverage from a better comp?

Rick Chambers

Well as we said, and I’ll let you do the numbers, but as we said in our earlier conference in early February be effected 2008 is about $5.5 million of operating income.

Unidentified Analyst

From the closings, correct?

Rick Chambers

Yes.

Unidentified Analyst

We're getting a lot of that back with the minimum-wage though right?

Rick Chambers

Yes, it is basically 100%.

Unidentified Analyst

So it's a wash.

Rick Chambers

Yes.

Unidentified Analyst

I'll pass on for others. Thanks very much.

Rick Chambers

Thank you.

Operator

We'll go next to Jill Caruthers of Johnson Rice.

Jill Caruthers - Johnson Rice

Good morning. Could you talk about your pharmacy, I know that the amp implementation date has been, kind of, moving around, if there are any updates to that?

Rick Chambers

Yes, Jill this is Rick. On the amp, as you said it has been moving around, that seems rather kind I think on that date of implementation, but we do, we are looking more, probably concentrating more on some state level issue is which are scheduled for the last half of the year. We don't really have anything new on amp, other than pretty much what you've stated. We do not anticipate any major amp first or second quarter, the earliest would probably be fourth quarter and possibly on into 09, based on what we are hearing.

Jill Caruthers - Johnson Rice

If you could talk about, I know you said in the past that stores that have pharmacies are more profitable than stores without pharmacies, if you could talk about that and maybe your goals of your store percentages with pharmacies, if you are looking to increase that, I know it's roughly about 40% of your store base right now is pharmacies. If you have a targeted goal in mind, if you're looking to increase that mix?

Rick Chambers

Yes, Jill we, our target would be around 50%. That's historically if you go back four or five years ago, that's roughly where we were in that range, and we have fallen off from that desired goal of 50%. But 50% would be what we are targeting on that.

Jill Caruthers - Johnson Rice

Could you breakout the profit contribution from pharmacies to your total company?

Jerry Shore

Jill, I'm going to jump in. We can not do that because of how we account for pharmacy as a department, just like we would any other product. So we've really can not break out the profitability product by product.

Jill Caruthers - Johnson Rice

Understood. And last question, if you could just talk about the competitive environment, maybe some of your main competitors, what they’re doing with promotional level, and if you see any impact to your customer traffic patterns given the changes.

Bruce Efird

Yes Jill, obviously with the macro trends going on in the environment, we are seeing an increase promotional activities, specifically in apparel and the home arena. I can't quote a measurement of how much that's affecting us as far as sales, that they are increased, we are seeing increased frequency of ads, our advertising and marketing agency is giving us metrics on increased radio and TV that we are seeing from some of our competitors as well.

Jill Caruthers - Johnson Rice

And what is Fred’s doing to combat that activity?

Bruce Efird

Yes, we do have, we’ve retained a new marketing agency and in the second quarter of this year we will be rolling out a new revamped marketing campaign. Also we’re looking at the timing of our ads to do a better job of gearing up the timing of our circulars and our prints around the holidays to be more effective. We’re also doing a better job with the new marketing agency of measuring the effectiveness of our promotional spin as well.

Jill Caruthers - Johnson Rice

Thank you.

Operator

We’ll go next to David Magee of SunTrust Robinson and Humphrey.

David Magee - SunTrust Robinson and Humphrey

Hi, this is Chris Reveljay on the call for David. Regarding pharmacy, I was wondering if you could speak to the function you were making for the benefit from generic sales from this year versus last year?

Jerry Shore

On the margin perspective we have been somewhat flat and the reason for that, as you look at total year, but I didn't allude to on Jill's earlier question on the income and state level issues we're dealing with on the Medicaid side, we do have budgeted for the last half of the year which does tend to offset the increase in the margins that we will see from the generic. We are still very positive about what we are seeing in the generic, it continues, we continue to perform what we believe above the market level in terms of generic dispensing that has been very positive to our margins. As Jerry alluded to earlier.

David Magee - SunTrust Robinson and Humphrey

So if you are, are you able to quantify defense per share impact that you are factoring in for amp for the year?

Jerry Shore

The dollars that we have in the second half relating to AMP, state legislative, it's around $1.6 million, is what we have for the last part of the year, but as Mike said it’s more slanted towards our state level concerns at the Medicaid level, and I don’t want to make it sound like we’re thinking AMP is a non-issue, that’s not what we’re saying, we are somewhat comfortable on our assumptions that we do not see AMP being a major, major issue in 2008 pushing to late ’08, at the earliest and more than likely into ’09, which the assumptions that we have built in revolving more around the state’s specific repricing issues that we’re looking at, which will mitigate a large part of the AMP in that when it occurs.

David Magee - SunTrust Robinson and Humphrey

Just finally, I think back in February he said that you expected a very small number of pharmacy stores be included in the closings, is that still the case and could you say how many pharmacies will be closed?

Jerry Shore

In total it'll be 20 pharmacies out of the 75. So we'll end up netting out, there’s only an overlap of around 2 stores that have pharmacies and a store combo both together. I'm sorry, one other thing, they'll all be closed by the end of next week. We'll have our pharmacy closing process completed within the next week to 10 days.

David Magee - SunTrust Robinson and Humphrey

Thank you.

Operator

We’ll go next to Andrew Wilson, BB&T Capital Markets.

Andrew Wilson - BB&T Capital Markets

Hello good morning. A follow up from the first question on the store closings; maybe you could help us with this, how long once you, and the 75 stores once you decide to close them, how long does it take sale whatever inventory you can sale is sold through, prior to the store closure. How long will that be, the process itself worthy inventory?

Rick Chambers

Andrew, I assume this is inventory kept in the store base, because technically it's still open.

Michael Hayes

Yes, it's kept in the store base and typically going through a normal liquidation would take eight weeks to close the store.

Andrew Wilson - BB&T Capital Markets

So the question I was getting to, there is some positive impact to the overall comp even at a discounted rate, pushing them, you know getting all the inventory out in that short of a period.

Rick Chambers

Yes there is, that is not, we didn't plan and their are very few stores closings that have occurred so far, so that is not having a major effect on this, on the comps that we’ve put out, very little.

Andrew Wilson - BB&T Capital Markets

Well that is good to hear, I just wanted to clarify that. On the 75 stories it's also good to hear that only two are pharmacy. I think last, on a call, I don’t know if you were prepared to talk about geography, you maybe didn’t want to tip your hands, but if you could do that now that would be nice, or if not could you give us a sense of the extremity of sister stores? What I’m trying to get to is, how much of the volume that’s being closed do you think you can reasonably expect to be transferred a nearby Fred’s store?

Bruce Efird

Yes there’s limited overlap in the stores. We’re anticipating a transfer of sales only at $2 million. Of course we have marketing plans in place to transfer as much business as we possibly can, and we’re not in a position throughout the season to talk about the geography and specific stores.

Andrew Wilson - BB&T Capital Markets

So these are stores that are, there’s not close enough to sister stores that you can, or are you just being very conservative with your retain business assumptions?

Bruce Efird

No that’s on par with our expectations, the $2 million transfer of business.

Andrew Wilson - BB&T Capital Markets

I'm just saying is that because there aren't a lot of stores nearby, these are all lying stores where are you just trying to be conservative and not make it too much optimism.

Bruce Efird

Your first assessment is more appropriate, Andy.

Andrew Wilson - BB&T Capital Markets

My last question on the quarter, obviously the sales were tough environment, as was gross margin, but looking forward to, even if you, back the cost savings, you're looking for some improvements on that, you were talking about the competitive environment it sounds like it hasn't gotten any easier, perhaps tougher, where do you expect, it looks like the numbers you're talking about you still need some gross margin improvement, said could you talk about after a really tough quarter on the gross margin may be even further dissect to why that was, was that just how tough this season was bored you just expect the mix to be better or the instock to bring that up? Where do you expect, as we go forward and try to figure out what the run rate, could you talk about gross margin and how you expect to improve that after it was obviously a pretty disappointing quarter?

Michael Hayes

Markdowns hit us pretty hard in the fourth quarter because we finally concluded all the events that were related to the soft line closeouts of the three businesses. Since the quarter with clearly disappointing, we went ahead and made sure to clean up everything relating to that, so it gives us as we go into 2008, it does give us some of that optimism and gross margin coming back that we wouldn't be facing that same issue. Bruce, maybe you can comment.

Bruce Efird

Yes, some of the margins initiatives that we are putting in place, number one is within pharmacy we will continue to see the benefits of the generic shift helping to improve the margin. We have initiates his around managing our promotional mix, as well as our revamping our private label program with promotions and place, as well as a whole revamp of private label which will impact our margins positively. Also, we just finished a meeting with 23 of our top vendors that make up well over 50% of business and from that we've had very positive response that we will see some improvement in promotional funds and relationships with vendors.

Andrew Wilson - BB&T Capital Markets

Just a quick follow-up, if you take out the $10 million from the cost of goods sold or add it to the gross profit dollars for the store closure is, and it's still about 25.7% for the quarter or that’s what it was, if you took out what Mike referenced to getting out of some of the apparel categories, is the gross margin pro forma excluding apparel? Was it actually higher in the fourth quarter, with that much of a closeout type of effect on the margin?

Bruce Efird

I don't think we've done that calculation that way. It's an interesting thought but we haven't done it that way.

Andrew Wilson - BB&T Capital Markets

Thank you.

Operator

We’ll go to John Lawrence of Morgan Keegan.

John Lawrence - Morgan Keegan

Good morning. Bruce, would you mind to comment publicly on what we've seen the last couple of months, I guess where the month of March is tracking? Talk about some of these successes you're seeing in these top 75 where they are performing a little higher, walk us through the process of that in stock, how much do you think being out of stock hurt you in sales?

Bruce Efird

John, we are seeing in our top 50 stores that make up approximately 39.2% of our corporate contribution, we have a focus on the stores and a sales focus in which we are at 3% comp increase over a balance of the stores. Another area that we are focused on is to improve our performance, is exiting non-strategic business such as e-commerce and our gas stations, that has been complete and on time. The reduction in force we announced early in February has taken place and we are starting to see the benefit of that as well. I can't exactly quantify the lift in sales, the results of our in stock initiatives, but it is a contributing factor to our February sales improvement.

John Lawrence - Morgan Keegan

Thank you.

Operator

We’ll go to William Keller of FTN Midwest.

William Keller - FTN Midwest

Good morning thanks for taking my call. Looking at the balance sheet and trying to think ahead for this year, two things, do you have a CapEx idea forecast you can give us, at the end of this year or fiscal ’07 that was higher than it's been in the last couple of years, is that something that you're looking to pay down over time or can we expect it to stay at a higher level for the near term anyway?

Jerry Shore

Yes, Bill it’s Jerry, good morning. Capital expenditures for 2008 will be in the range of $20-$25 million down as a result of fewer store openings, implicating our store refresher program, etc. moving it to be debt at the end of the year, that is the debt that I cited at the end of the year included the acquisition of the real estate that we did in the current year as well as the increase in year end to improve our in stock levels, absolutely we intend for this year to keep our borrowings in line with where they have historically been and not make any major changes in our capital structure as to how we manage our business with internally generated funds. We are in not anticipating to be in debt at the end of the year after seasonal borrowing etc.

William Keller - FTN Midwest

Understood, thank you. The categories refreshed in 07, seemed to do well as the year progressed, do you have plans for additional categories to refresh this year our focus on the basics and consumables and other things you've already discussed.

Bruce Efird

Yes we will continue to focus on pets, and we see that the pet sales continues to grow as well as consumables, we remain strong in electronics sales and our refrigerated/frozen areas continue to grow. So we will continue to focus on them throughout the balance of the year.

Keith Curtis

I’ll add, this is Keith Curtis, we have a special buys and special treasure hunt items

that we also have is a key initiative, will help our gross margin. We've been very successful so far, we haven't renewed candidate to planning and actively marketing special items and treasure hunt items also that will help in those [inaudible] stores that we were discussing.

William Keller - FTN Midwest

So these special buys, and that sort of opportunities, are you looking in specific categories, like for example apparel, was is it more broad-based whatever seems like it would fit good in the stores?

Keith Curtis

We’ve been very broad-based, the top stores that Bruce alluded to have yielded several good opportunities in that area and our ability still to take smaller quantities as a positive for us there. Been in the market quite a bit since I’ve been in the position and I’ve been very excited about that, very exited that we’ve identified a group of stores that we can move through some very good opportunities very quickly on, we’re looking forward to doing that for the remainder of the year.

Bruce Efird

Just one example, just to give you a flavor of what we’re looking at and being very selective on our choices, is a 20 piece comforter set that was $199 at another retailer that we will be able to sell at $69 and make very good margins, again just to give you a flavor of some of the opportunities that we see.

Keith Curtis

Those will come in a variety of departments to answer your question.

William Keller - FTN Midwest

Very good, thank you very much.

Operator

Mr. Hayes, at this time there are no further questions in the queue. Are you ready for me to turn the conference back to you for additional remarks?

Michael Hayes

Thank you everybody for going through this with us today, we are feeling good again about our programs and the initiatives that we’ve put in place and we look forward to 2008 with a lot of optimism. Have a great day.

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